Weekly Market Update: September 12, 2023
The Federal Reserve has received a number of key reports ahead of its late-September Federal Open Market Committee (FOMC) meeting. The central bank, which said it will be data-driven in formulating near-term monetary policy, had to like the continued moderation in the Personal Consumption Expenditures (PCE) Price Index. According to the Labor Department, the PCE Price Index rose 2.5% in the second quarter, versus the prior estimate of 2.6%. Likewise, the July PCE and core-PCE Price Indexes both increased 0.2%, month to month, which on an annualized basis would be close to the Fed’s target rate of 2.0%.
Recent labor market data also had to please the central bank. The nation created 187,000 jobs in August, which came in above expectations, but the recent uptick in the unemployment rate (from 3.5% to 3.8%) may be an indication that the Fed’s goal to slow job growth in an effort to fight wage inflation is working. The growth of the average hourly wage eased some in August, and there were some signs that this trend will continue. The increase in the labor participation rate and the notable decrease in the Job Openings and Labor Turnover Survey (JOLTS) suggest that more people will be competing for fewer jobs. This may put some downward pressure on wages.
These reports have led Wall Street to envision a “Goldilocks” scenario. In general, inflationary pressures appear to be easing and not because the U.S. economy is faltering. This has kept the thesis that the Fed can orchestrate a “soft landing” for the economy in place. Renewed calls that the central bank may pause again on the monetary front at the next FOMC meeting pushed Treasury market yields, which spiked in mid-August, lower and gave a boost to equities.
The consumer continues to spend. In July, personal expenditures jumped 0.8%. However, spending did outstrip personal income growth (+0.2%). This pace may not be sustainable, as savings accounts shrink and credit card balances balloon. In addition, student loan repayments are set to resume in October.
Conclusion: Equities entered September at elevated valuations. This leaves them susceptible to selling on disappointing news. In this environment, we continue to recommend a portfolio of mostly high-quality companies.